A monthly commentary for investors and their advisors about how the quirks of human behavior

drive investing...and what you can do about it

The Misbehaving Investor

Following our perceptions make it easier for us to live. See something...then take action without sitting around and overanalyzing things.

But perceptions do not always equal reality and blindly following them doesn't work too well in investing. In this issue we take a look at the backyard pool to highlight the pitfalls of letting our perceptions drive behavior.

John Heldman, CFA

President

Dave Hutchison, CFA

Managing Director

About Us

Triad Investment Management manages equity and balanced portfolios with a focus on Research, Behavior and Ethics. We invest in companies with a business-buyer's perspective. Founded in 2008, Triad is a 100% employee-owned SEC registered investment advisor. Learn more at www.triadim.com.

Triad has $139 million of assets under management as of June 30, 2014. The Concentrated All-Cap Equity composite return, annualized and net of fees since inception, is 13.0% vs. 8.2% for the S&P 500 Index (April 30, 2008 to June 30, 2014).

Summer is officially over. Guess what? It's hotter than Hades around here. Yes, September is often hot, but I could use some relief.

And I got some the other day, although it was a form of comedic relief. Ok, maybe just a chuckle. I'm reading the Los Angeles Times, one of three papers I consume each day. Yes, I still get papers delivered to my house. Let's discuss that another time, perhaps during a dinosaur discussion. I couldn't miss an article on the front page titled "Drought Tolerant". Given my heightened interest in the water situation here in the desert, also known as Southern California, I read the article. And what did I learn?

I learned that, as we see in many other areas of life, perception can be quite different from reality. And ultimately, it's the facts that matter.

Pools, it turns out, don't consume as much water as commonly perceived. Anyone who has flown into our airports has seen all of the pools in existence. Thousands of them. Recent analyses by several water districts and scientific studies conclude that pools and surrounding hardscape consume about as much water as a lawn of the same size. Throw in a pool cover to control evaporation, and a pool can be about as efficient as drought-tolerant landscaping. Who knew?

I know what you're thinking. What about all that water to fill the pool? See the graph below from the article. Their analysis includes the initial pool fill. It demonstrates that the water saved by not watering grass results in water savings after year 3 compared with a traditional lawn.

What about my neighbor's drought-tolerant landscaping? Sorry...after 4 years a pool with a cover cumulatively uses less water than your environmentally conscious neighbor Phil with his backyard full of water-sipping drought-tolerant landscaping.

Ok, you're saying, what in the world does this have to do with investing? Plenty. My perception, and probably yours too, was that pools aren't the best water-saving devices known to mankind. And they're not. Dirt is better. Cement is better. But measured against the common water-guzzling green lawn, pools are much more water-friendly than commonly perceived.

Perceptions play a significant role in shaping our opinions, attitudes, and ultimately our behavior. Our job as investors is to recognize that opinions, assumptions and perceptions are just that. They are not facts.

Ultimately, we as investors are rewarded when we uncover the relevant facts and we apply sound reasoning and judgment to the facts at hand. But first we gotta have the facts. That's what we spend our time doing: reading, analyzing, digesting, deciding.

While it's fun to jump into a pool, let's make sure as investors we don't jump to conclusions without all of the relevant and important facts. That way, you won't end up feeling financially all wet.

-John Heldman, CFA

Past performance does not guarantee future results.

Results are presented net of fees and include the reinvestment of all income.